Newspapers Struggle to Respond to Web Challenge

The newspaper business is bad and getting worse. The Web is stealing the industry's readers, advertisers, revenues and even its enthusiasm for the business. But as newspapers struggle to respond, lessons for other industries confronting disruptive technologies are emerging.

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A clear, crisp winter morning in the South End of Boston. Beneath an overpass, at the crossroads of two of the
city’s main highways, yellow-and-blue delivery trucks line the parking lot of The Boston Herald,
the nation’s 43rd-largest newspaper, with a daily circulation of approximately 230,000 (150,000 on Sundays). Once a part of the Hearst publishing empire,
the struggling paper was sold in 1982 to Rupert Murdoch’s News America Corp. for a mere $1 million. Murdoch promptly laid off nearly 200 employees and
offered others buyouts. The media mogul introduced computers and Australian editors to the newsroom, and the paper offered prizes and giveaways to attract
readers. In 1994, with the tabloid still struggling, Murdoch sold it to its publisher, Patrick J. Purcell, for between $15 million and $20 million. Today,
inside the cluttered Herald newsroom, reporters and editors peck away at keyboards amid the crackle of police scanners. The carpeting is stained and threadbare,
wires hang pendulously from the ceiling. The room is dotted with empty desks, in large part because the paper has laid off at least 25 percent of its writers
and editors over the past couple of years. Memos, including an aging photocopy of how to properly fill out a time slip, are taped to pillars running down the
middle of the room. Dismal as it may seem to an outsider, the scene is nothing new to the Herald, a paper that for years has run a distant second to its
crosstown rival, the New York Times–owned Boston Globe, with its daily circulation of 414,000 (670,000
on Sundays).

But it doesn’t take a visit to the Herald’s run-down newsroom to understand how badly the newspaper industry has fared in recent
years. Across the industry, ad revenue­, which is how newspapers make most of their money, grew by less than 3 percent in 2005 before flatlining in 2006,
according to this year’s “State of
the News Media” report by the Project for Excellence in Journalism. The Newspaper Association of America reported this past fall that circulation
for the some 770 dailies in the United States dropped 2.8 percent in 2006. On Wall Street, newspaper companies took a pummeling, with stock prices typically
falling by an average of 14 percent. In desperation, many newspapers have begun to merge with, or acquire, their competitors in an attempt to gain market
share and leverage economies of scale. In March 2006, Knight Ridder, then America’s second-largest newspaper publisher behind Gannett, was bought by
a smaller outfit, McClatchy. In New York, former General Electric CEO Jack Welch and some investors offered to purchase the Globe from the Times for between
$500 million and $600 million. The Times, which had bought the previously family-owned Globe for $1.1 billion in 1993, rejected the offer. But just a few
months later, in January 2007, the Times turned around and devalued the Globe and the Worcester Telegram & Gazette (another Times property) by more
than $800 million.

What’s gone so horribly wrong with the newspaper business?

Many believe the answer is simple, profound and inescapable:the Web.

As Print Slept, the Web Became Its Nightmare

Newspaper executives, many analysts argue, just don’t understand the disruptive
effect of the Web on their business and as a result have jeopardized the future of their papers, their companies and the investments of their shareholders.
Others take a more nuanced view, claiming the newspaper industry’s response to the Web is typical of any mature industry confronted by a new, disruptive
technology. That is, the newspaper lords knew it was important; they just didn’t know how to incorporate it into what is, in the United States, a
300-year-old business model. With pressure from stockholders and investors, publishers worried about the bottom line for the coming quarter or year, not
about what might happen in five years.

“It was rational self-interest,” says Phillip Meyer, a journalism professor at the University
of North Carolina who has studied how newspapers have been affected by new Internet technologies. “If their goal was to maximize return on investment,
then sticking to [print] and avoiding high-risk [Internet] investments made sense,” he says.

Despite the pessimism of those who tally the mergers,
layoffs and tanking stocks in the newspaper business, some experts believe newspapers can be saved by using the Web to reinvent themselves and thereby retain
their role as a vital institution in American society. If they fail, and newspapers begin to fold with the great rapidity many expect, the loss to the American
polity will be incalculable. In either case, there will be some valuable lessons other businesses can learn about dealing with disruptive technologies:
principally, that one’s customer base and competition can change overnight, and a failure to prepare for that change can have catastrophic consequences.

TOP 5 DAILY NEWSPAPER SITES

The Web has expanded the overall readership for the nation's top daily newspapers.
Here are website statistics for the top 5.

NEWSPAPER

UNIQUE VISITORS JULY 2006

The New York Times

12,048,924

The Washington Post

10,172,717

USA Today

8,612,138

The Wall Street Journal

6,512,920

The Los Angeles Times

4,260,858

Source: Nielsen NetRatings.

Mistakes Were Made

Jennifer Carroll, vice president of new media for Gannett—America’s largest newspaper publisher, with 90 titles, including
USA Today—has been working in the industry since
1981. She got her start as a reporter at the Port Huron Times in Michigan. Climbing the editorial ranks, she became managing editor of the
Detroit News in 1997, a period remembered as critical (and ultimately regrettable) in the history of American newspapers. With the dotcom
bubble in its infancy and acknowledging the importance of establishing an online presence, Gannett and its competitors began putting their
papers online—the news stories, the features, the comics and the classifieds. It was a newspaper you could view in a browser and little more.

“Industrywide, if there’s anything we know now that I wished we’d known then, it was about how to use the Internet and then
respond accordingly,” Carroll reflects. “But instead we raced to put our print newspaper online.”

During this era, newspapers made a mistake typical of companies adjusting to new technologies: They attempted to employ old methods in a new
environment. Scott Anthony is president of Innosight, a consultancy started by Harvard professor Clayton Christensen, who was credited with
coining the phrase disruptive technology. Anthony says that instead of exploring the Internet’s capabilities, newspapers simply replicated
their print product on the website. “A colleague of mine calls it ‘All the news that’s fit to pixel,’” Anthony says.
“None of this was bad, but it wasn’t sufficient.” Many, however, thought it was.

For a while, doom and gloom forecasts abated and the industry enjoyed reasonable growth. “A lot of print people said this isn’t going
to be so bad and a lot of this isn’t going to come to pass,” says Marc Frons, CTO for digital operations at
The New York Times. “I think it’s only been
in the last year or so that a lot of media companies have woken to the fact that not only is the Internet here to stay, but it’s really
changing and impacting their businesses in profound ways.”

In addition to reproducing an old product online, the industry’s strategy preserved ancient internal processes in amber. During the late
1990s and the early part of this decade, many papers began to try to merge their online and print departments, believing it would streamline
their business to have their staffs working for both mediums, says Vin Crosbie, who runs a newspaper consultancy called Digital Deliverance.
Rather than acknowledge the difference between print and the Web, and the markets they serve, they tried to run both products on the print
business model. “There’s a whole fleet of people trying to do convergence,” says Crosbie, “but the papers that created
separate [online and print] departments often did better because they could do what should be done online without having to worry about the
legacy content and business models.”

Websites Stalk Newspaper Revenue

You’ve probably heard this story
by now. In the mid-1990s, Craig Newmark started Craigslist.org
out of his apartment in San Francisco. (See
here
for Newmark’s views on online business.) It began organically, with users posting information about concerts, apartment rentals and job
postings—all free of charge. Though he didn’t know it at the time, Newmark had begun eviscerating the classified advertising market,
a staple revenue generator in the print newspaper business model. “The ultimate bad competitor is Craig Newmark,” says UNC’s
Meyer. “I used Craigs­list recently, and I felt guilty about it.”

If they love newspapers as much as Meyer, Craigslist users should feel guilty. The Project for Excellence in Journalism reported that in 2004
the San Francisco Chronicle in Newmark’s
hometown lost an estimated $50 million in classified ad revenue to the site. More significantly, Craigslist’s effect on newspapers highlights
one of the main challenges an industry encounters when a disruptive technology upsets its market: Not only is the core business broadsided by the
fact that its product becomes available at a lower cost, but the task of identifying the emerging competition becomes strategically daunting.
Newspapers with deep pockets have partially weathered bad competitors like Craigslist by analyzing the demographics of their customer base through
registration data and surveys. At the New York Times, for instance, Chief Advertising Officer and Senior Vice President Denise Warren says the
NYTimes.com audience—with an average age of 48—is “educated and affluent,” and knowing that helps her reach advertisers.

“In any business, you’re going to have the providers who are free or low cost, and you’re going to have providers that are high
value,” says Warren. Since the Times can’t compete on price with competitors like Craigslist, it is attempting to sell advertisers on
the uniqueness of its specific audience.

Old Business Models Fight for New Life

How effective this has been for the Times, widely seen as the industry’s leader, remains to be seen. On Sept. 21, 2005, the Times reported on
its own business page that it would cut its workforce by 500 employees, using buyouts and severance packages. It attributed the decision to soft
growth in advertising revenue and dips in circulation. While NYTimes.com has garnered the largest Web audience of any newspaper, its staggering
traffic still doesn’t drop much to the bottom line. In fact, around 8 percent of the company’s revenue comes from online operations,
says Warren.

That’s one of the major problems in dealing with disruptive technology. When a company is propelled abruptly into a new business with new
competitors, the old business (which is in decline) remains for a significant time the primary bread­winner. In fact, according to a recent
report by Merrill Lynch, it could take newspapers 30 years before online revenue will represent at least 50 percent of their top line.

Closing the gap between the revenue generated by the old model and that produced by the new is one of the greatest challenges for businesses adapting
to disruptive technologies, and it’s been an especially tough nut to crack for newspapers, says Gannett’s Carroll.

One strategy newspapers have employed has been to try to ensure that online revenue growth outpaces the annual decline of print and to adjust investment
accordingly. But Innosight’s Anthony says executives facing disruptive change should utilize technology to improve their old business too—not
just to build the new.

In December 2006, Wall Street Journal
Publisher L. Gordon Crovitz published an open letter to his readers, telling them that as the paper’s website has been so effective in covering breaking
news on a 24/7 basis, the print paper would start producing more “analysis.” (Subsequently, the Journal drastically reduced the size of its print
product’s format.)

Small and midsize newspapers across the country have begun trending in that direction too. At the
Seattle Times, Executive Producer Stanley Farrar says
analysis is “the most important thing we do.” People working in the industry claim the strategy of defining different roles for the online and
print products has given many newspapers a new sense of purpose and more optimism about their future. Newspaper-killer Newmark adds, “At some newspapers,
they’re making good progress using the new technology to do a better job,” he says. “At others, they’re using new technology as an
excuse.”

How Quick and Dirty Can Win the Race

Newspapers have informed the world of their plight.
“Read any newspaper,” says David Thurm, VP and CIO of the New York Times. “We report a lot about ourselves.”